How to Switch to a Freemium Pricing Model and Grow Your Business

Updated On: August 01, 2019
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Often times, when marketers think about growth, the first strategy to come to mind is finding ways to make the product better. The better the product, the more people who'll buy it, right?

The truth is that to stimulate growth, marketers should instead focus on the experience customers have at every product touch point. After all, experience is what makes customers happy and excited to come back and use the product again.

In her talk at our recent Recur conference in Boston, Kristen Craft, the Chief Revenue Officer at Tettra, shared how they decided to ditch their free-trial pricing strategy and adopt a freemium pricing model instead.

The thought of breaking up a system they'd relied on for so long came with some uncertainty—namely whether the shift would actually work. Tettra's approach to the shift focused on improving the user experience to make sure they were getting the most out of the product before paying for it.

The results—changing how they do business—will surprise you!

Using Tettra's experience as an example, here's how to make the switch from free trial to freemium and how to measure success. We'll also look at how changing to a freemium pricing model aids long-term growth when you keep experience at the center of your decision-making process.

You're losing when experience takes a backseat to product

When we talk about experience, Kristen explains that it refers to “how it feels to interact with a company, brand, or product.” Every single touch point has to leave customers excited to do business with you. Everything from onboarding to talking to someone in customer support to reading a blog post should embody your dedication to customer experience.

Put another way, “your brand is the sum total of experiences that every customer has with your company.” The experience you offer is what makes your product stand out and makes people want to keep coming back. In fact, 86% of customers say that they don't mind paying more for better service.

Slack, released to the public just six short years ago, has seen tremendous growth and now sits at 8 million active daily users. There's no doubt that it's set the bar high for simplifying team collaboration and communication. There are new features and integrations rolled at frequently—based on user needs and feedback—giving them an edge over the competition. For them, customer experience drives much of what they do.

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On the other hand, HipChat, which was around before Slack, offered similar features, but a massive data hack in 2017 set it back and it was eventually acquired by Slack.

Using these two brands as an example, Kristen makes it clear that “you don't sell products, you sell experiences.” Winning brands know that experience differentiates one competitor from another, not just the product. The experience you offer users can't be copied because it's unique to you.

Build a framework for switching to freemium

Keeping user experience top of mind, Tettra took a look at its product and thought about how it could change to give customers a more organic experience. Instead of asking users to buy a paid plan after a short trial period, Tettra wanted to test whether giving users more time to use their platform caused them to experience more of the promised value and then convert to become long-term customers.

Tettra's original product included a 15-day free trial that they felt didn't give users enough time to “invest and put their knowledge into it to later reap the benefits” before they tried to convince users to buy. Tettra decided to consider switching to a freemium pricing model to fix this.

Kristen explains that “freemium isn't just a way to let people try a product; it's really a way to let people try an experience.”

To decide whether the freemium pricing model was right for them and would offer users a better experience, Tettra created a framework consisting of four questions:

  • Is there product/market fit? They wanted to know if they have a product people want, need, and are willing to pay for.

  • How do customers feel about the current free trial offer? They wanted to make sure they asked customers how they feel about the free trial.

  • Will the risks be manageable? They wanted to know what the risks were and whether they were prepared to handle them.

  • What's the right trigger? They wanted to figure out at what point users on a free plan move to a paid plan.

The benefit of having a framework is the guidance it offers during the process. It gave Tettra clarity on their next steps, goals, and a plan to measure the outcome afterwards.

Before changing any part of your business, create a framework to follow. Using Tettra's framework as an example, here's what it would look like for your SaaS business:

1. Confirm product/market fit

Product/market fit is defined as, “Being in a good market with a product that can satisfy that market.” But since market needs change, you need a way to figure out not only whether you've achieved product/market fit but also consistently meet it.

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To do so, focus on your market and audience pain points. Let's say you have an email marketing product. Think about how user expectations change over time. Do they want more templates to choose from? Better email analysis options? Once you understand this, build the product users need.

Keep in mind that you have product/market fit when you build your product and people choose to use it. At this point, your focus becomes “deliver and grow.”

Once you've figured out your fit, don't stray far from it. You might encounter opportunities to cater to users outside of your niche or market fit, but this won't help you grow. Instead, it'll cause issues. Tettra caters to companies with about 15 - 150 employees. There have been opportunities to work with large enterprise brands outside of Tettra's niche, but the concern has been spending more time going through a lengthy authentication process rather than focusing on nurturing relationships with the right customers.

2. Find out how people feel about the product

Before blowing apart your pricing model, ask customers what they think about the free trial option. Let's say you offer a 30-day free trial period, and users feel like that's enough time to get accustomed to the product and experience value, then there's no need to change the pricing model.

To figure out what your users think, send surveys via email and Rich Media Messaging.

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You can also ask users who call into customer support for feedback and post polls on your social media channels. The goal here is to target users where they spend time online, so you get a large sample of respondents to analyze.

3. List potential risks

With any type of change, there are going to be risks. The key is being able to identify them early on and make a plan to manage them.

Kristen explains that the risks Tettra faced included user churn, reduced conversions from a free to a paid plan, and users taking longer to convert.

For your product, think about what aspects of your pricing model are working and the risks you'll encounter if you make changes. Will the pricing model get more complicated? Will you attract less ideal users who aren't likely to stick around?

Also think about what else will have to change to maintain a positive user experience. For example, will you have to change the onboarding process, update the logistics of the new pricing model, add more resources, create informative blog content, train the support team, or change the website and other online collateral like social media, ads, and more?

4. Decide which trigger to track

At some point during the freemium period, users switch to a paid plan to get more benefits and meet their growing needs.

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Your goal is to figure out what that trigger is. The trigger should be organic and not time-based because that strays back into free trial territory where there's pressure to buy after a certain amount of time.

The trigger represents a point where you think users are the most likely to convert. This might be when users reach a certain number of subscribers; users share a certain amount of data; users use a certain amount of space. For Tettra, it was when users created 20 pages. This is where users were able to start to get value.

Your trigger depends on your product, how customers use it, and the point where you think users are the most likely to convert. The more users using your product and investing time into it, the better the chances they'll convert and buy.

The truth is in the data

With research complete and a plan in place to proceed, Tettra launched their freemium product in August 2018. During her talk, Kristen shared five key learnings from the process.

As you plan to undertake your own updates, use these insights to help you understand the risks and plan for them.

Don't give people an experience they know is going to go away after some time. They're less likely to convert because of the pressure they feel as the deadline approaches. Freemium works because it gives users time to get to know the product.

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With more time to sign up for a paid plan, Tettra saw that there was an immediate uptick in new users signing up for the platform. Users were more willing to sign up and spend time using the product.

It may take longer for people to buy with the freemium plan. However, this isn't a bad thing. As Kristen advises, look at it as users getting to know the product well and you creating a loyal user base that's retained for a long time. With longer retention, your users ultimately have a higher LTV compared to users who signed up with a limited free trial.

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Tettra found that it took an average of 50 days for freemium users to convert to paid customers. This is considerably longer than the initial 15-day trial, but Tettra used that time to reinforce the experience they wanted to give their users. Kristen explains that they had to “trust that in time, people would fall in love with the product.”

User calls to customer support may increase but use this as an opportunity to focus on experience. Listen to what users are asking and use their feedback to keep improving your product.

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Tettra experienced about a 40% jump in calls to customer support after the freemium pricing model launched in Q3. For Tettra, this was an opportunity to talk to a lot of people they wouldn't have otherwise had a chance to. This was an opportunity to find out more about their users and learn from them.

Revenue might drop initially because people are taking longer to convert, but chances are there will be a resurgence in MRR. In the meantime, focus on maintaining a positive customer experience.

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Tettra saw a drop after the launch, and they were unsure of how long the dip would last. Fortunately, MRR is beginning to recover. Kristen's advice is that “if your business doesn't have the tolerance to stand a potential drop in revenue, this might not be the move for you.”

Upsells will increase naturally. Instead of getting people to choose a plan upfront with a list of all possible features and options, focus on the user experience. For example, send more emails filled with helpful insights than sales emails. This helps create a strong, long-term user relationship where they naturally convert as they enjoy the positive experience, use the product more often, and their needs expand.

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Tettra experienced a huge boost to upgrade revenue after the launch. Part of this is the natural growth that happens when internal teams invite each other to join. Plus, as Kristen points out, they were able to “ease people into the more robust features. Tettra didn't have to throw everything at new users on day one because they're limited by 15 days.” Because there's more time, users could gradually learn about the product, and Tettra could focus on user experience.

Your freemium pricing model needs to put customer experience first

Kristen explains that “freemium is not a pricing strategy—it's an experience strategy.” It's how people perceive the experience of working with you.

She continues, “it's more than just updating a pricing page and hoping customers will come and the product will grow. A successful freemium model is about changing the company mindset and giving people the best possible experience.”

If you're thinking about making the switch from free trial to freemium, make user experience the priority. You'll find that you position yourself to grow your business in a more sustainable and natural way.

Tags: freemium

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